Acme Incorporated has $20 million to invest. The company’s CEO has three investment options: expand production; invest in stocks; or buy deposit certificates. The return from expanding production or investing in stocks depends on whether the economy continues to boom or enters a recession. The CEO estimates that there is a 30% chance of a recession. She also estimates that
• expanding production will generate a positive return of 15% if the economy continues to boom and a loss of 10% if the economy enters recession;
• investing in stocks will generate a positive return of 12% if the economy continues to boom and a loss of 5% if the economy enters recession; and
• investing in bank deposit certificates will generate a positive return of 6% independent of economic conditions.
a. What decision should the CEO make if she uses the maximin strategy? Explain.
b. What decision should the CEO make if she uses the maximax strategy? Explain.
c. What decision should the CEO make if she wants to maximize the expected profit of the investment? Explain. DOWNLOAD THE SOLUTION HERE